Renewable energy strategies for Europe

Rent,wab/e F~tergy, Vol.5, Part I, pp. 83-101. 1994 Ehevler Scieace Ltd Printed in Great Britain 0960-1481/94 $7.00+0.00

Pergamon

RENEWABLE ENERGY STRATEGIES FOR EUROPE

Dr Michael Grubb Head, Energy and Environmental Progtmmne Royal Institute of International Affairs 10 St James's Square, London SW1Y 4LE

Paper to the World Renewable Energy Congress, Re a,zjing, September 1994. This paper summarises the results of a study of the same title carried out to examine the prospects for renewable energy in Europe and the policy issues entailed in promoting them.

PART 1. The basis for European renewable energy policy Technical developments over the last two decades have made renewable energy more plausible by increasing the conversion efficiency and greatly reducing the cost and materials requirements of many renewable technologies. Various recent studies, culminating in two authoritative international collaborative assessments published in 1993, conclude that renewables could indeed make large contributions to the world energy needs. But there are economic and political obstacles to much greater use of renewables. Without government support, few renewable technologies are attractive to private investors in current energy markets at present prices, and new objections about the environmental impact of renewables, and resistance to siting, are emerging. There are also a variety of perceptual and other noneconomic obstacles, ranging from valid concerns about local environmental impacts to sheer ignorance and prejudice on the part of decision-makers, as well as a variety of specific barriers arising from current structures in energy markets. In Europe, five distinct motivating forces can be identified. Environmental concerns, promoting renewables as the basis for sustainable energy supply, are the most obvious and are reflected in a wide variety of specific environmental issues and policies. "Energy dependence" is the second most widely cited factor, arising from the fact that Europe has relatively poor energy reserves and early in the next century is likely to become heavily dependent upon imports of all three fossil fuels. Rural and agricultural pressures form a third and potent motivating factor. Increasing agricultural productivity and pressures to open up European markets to lower cost food imports have left farmers and policymakers are desperate for alternative ways to generate rural income - such as from biomass energy. Fourth, the fact that renewable resources are dispersed and often away from current centres of economic prosperity is a socio-economic advantage in terms of generating income and employment for more remote and depressed areas of the Union; correspondingly they can offset urbanisation pressures; renewables could also assist more generally in the context of employment-generating policies. A final motivating factor is technology policy, viewing renewables as a potentially profitable area for large productivity gains and competitive advantage if aided by government support. The Council's ALTENER goal to double the EU's current renewable energy contribution to 8% of supply by 2005 would represent a dramatic expansion in the contribution of new renewables but a modest fraction of the long-term potential. The numbers indicate that

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84 renewables can make a significant contribution to emission goals already set in Community environmental legislation, and more general and longer term goals set in the Fifth Environmental Action Programme. National level policy will remain very important for renewables for a long time. The scattered national initiatives are significant but clearly not sufficient for approaching the ALTENER goal, or for achieving bigger and longer term contributions, and they lack coherence. The only credible policy elements in ALTENER concern information and harmonisation of technology standards. The lack of substance in either budget or policy means that ALTENER does not represent a European strategy, but rather serves to highlight the absence of one. The EU's renewable energy policies have implications beyond the Union's borders: directly, in terms of moves towards European expansion and international assistance programmes; and indirectly, through the development of renewable energy technologies and industrial capabilities in Europe and the possibilities which this creates and demonstrates for applications in other countries. The actual opportunities and impacts depend heavily upon the nature of foreign markets and their institutional and economic relationships with the EU. Renewable energy is not yet significant in the Union's external energy linkages.

PART II. Experience with energy R&D and policies for promoting renewables Research and development has become an increasingly important and organised part of corporate activity throughout the century. Private energy companies increasingly seek a clear definition of the path from R&D to project commercialisation, and generally focus upon processes in the field of their current activity rather than more generalised research or activities outside their "core business". Oil companies, major sponsors of renewable energy R&D in the 1970s, have largely withdrawn to focus upon their core business. There are many widely acknowledged reasons why companies invest less in R&D than is desirable for society overall, and may not invest in areas of greatest benefit to society; hence the universally accepted role for government R&D policy. The history of energy RD&D in the US and several other countries reveals several problems: poor definition of goals and of plausible paths from research to commercialisation; too much emphasis upon big, centralised projects; persistent underestimation of the difficulties facing large, complex generating facilities; inadequate consideration and sometimes wild projections of the market characteristics and likely demand for the technologies being developed; a chronic difficulty, due to inadequate independent oversight and control, in halting big programmes when circumstances change; and, for smaller technologies especially, insufficient attention to the dissemination of results and replication of technologies. Renewable energy has gained a steadily increasing importance in EU energy RD&D, and with the budget for renewables set to treble under the 4th Framework Progranm~e, it is vital that the lessons of past failures be reflected in the development of renewable energy RD&D strategies. Efforts to stimulate renewable energy markets to date have met with variable success. In the US, the biggest developments occurred in Californian electricity, where effective elements comprised thorough resource surveys, legislation allowing independent power generators to sell electricity at regulated (and with hindsight generous) prices, and extensive tax incentives. The scale of incentives stimulated rapid expansion of investment especially in wind, geothermal and solar thermal electric generation which led to rapid cost reductions; but also chaotic

85 developments and a backlash which led to a collapse of the process. Support in Denmark was also extensive but wanned over a longer period as a more integrated programme, all in the context of strong environmental policy and high electricity prices and has proved ultimately more successful. Austrian support for the use of wood for heating since the early 1980s primarily banning of dumping of forest industry residues combined with capital grants for district heating - has led to such applications supplying about a quarter of Austrian heat, more than 10% of primary energy requirements; their biodiesel programmes have not led to the same

success.

Apart from Denmark, various members of the EU implemented policies to stimulate markets for renewable energy around 1990. The most dramatic case was the UK, where the "non-fossil fuel obligation", originally created to ensure adequate revenues for nuclear power in the aftermath of electricity privatisation, was extended to renewables. Competitive tenders were invited for contracts at premium prices. Despite initial problems the scheme resulted in an explosion of renewable energy activity for power generation. The UK experience highlights the benefits and drawbacks of a primarily market-led stimulation, and its relative success has drawn heavily upon the technical and industrial foundations laid elsewhere as well as government R&D and information supports.

PART II1: Electricity systems and the primary electricity sources The economic prospects for renewable electricity sources depend heavily upon the characteristics of the rest of the system: the fuel displaced, the need for new capacity, the location of the plant relative to other production and demands, the terms of access, and the relationship between the source output and demand. Supplies for isolated villages and houses, which account for a few percent of European electricity demand, offer a particularly promising initial market. Grid extension remains a common planning goal for utilities but growing environmental constraints on overhead lines increase the costs. In such isolated applications the variability of renewables is a drawback but enough experience has been gained to design integrated control systems including combinations of renewables, storage capacity and load management. The need now is for a compendium of options and experience and associated system modelling tools, and greater field experience and case studies, as a basis for a targeted strategy drawing on the Union's Cohesion funds. An important obstacle at present is that the real costs of remote power supply through grids is often hidden. The bulk European power systems, through which more than 95% of Union electricity is consumed, has major regional variations. In most of north-west Europe (excluding Ireland), electricity demand growth is slow and coal and oil generation have been largely displaced by nuclear and increasingly gas-fired generation, with excess capacity overall. This forms difficult competitive generation conditions unless a gas shock or nuclear accident reverses these trends. In southern Europe and Ireland, demand growth is much stronger, nuclear power is improbable, and relatively inefficient coal and oil plants arc likely to remain mainstays of generation for many year; in principle these are much more promising conditions. In Germany and Dcmnark the position is more ambiguous, with slower demand growth but resistance to nuclear power and reluctance to move too far or fast towards gas generation.

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Variations in delivered electricity prices highlight a complex picture. Delivered prices are typically at least twice the bulk generation costs due to various network and systemic costs, indicating the potential additional value of smaller-scale renewables in cases where most of the output is consumed on the local network. Delivered prices also vary greatly between different countries, and different consumer groups, highlighting the complexity of the market and the opportunity for niche applications. Concerns about the variability of primary renewable electricity sources have been greatly exaggerated. The positive seasonal correlation between electricity demand and wind and wave energy in northern Europe is a positive advantage, and the lack of short-term correlation at times of peak demand is not a significant drawback; system studies confirm that contributions of 5-10% of demand are just as valuable as that from "firm" baseload sources and the value declines only slowly at higher penetrations. Local network and transmission issues may need attention, but the larger dispersal implicit in larger capacities reduces the aggregate variations and it seems improbable that significant operating penalties will arise from the variability of such sources, so that contributions of 25-40% of electricity production without storage. Hydro or other storage would increase the technical capability still further. The situation is more complex for PV, but the positive daily correlation with electricity demand, and in some cases direct short-term and/or seasonal correlation with peaking loads, can increase its value compared to conventional sources. The obstacle for renewables arises not because their variability imposes big penalties, but from the fact that tariff systems for independent power frequently do not reflect their full value. European electricity industries are undergoing major structural changes. Where vertical integration of generation and transmission is maintained, there are opportunities for US-style "least-cost planning" which includes requirements to examine renewable options and take explicit account of external costs. Where more competition is introduced, this will increase the access for independent renewable electricity generation. Regulations could and should be framed to reflect the varying costs over networks, and thus increase the opportunities for taking advantage of local matches with rural and remote parts of networks, and other niche markets; but to date this has not happened. Conversely however, competitive structures raise the costs of capital and increase competitive pressures from other new sources, such as advanced gas plant. Current structural and technological trends point towards the concept of "distributed utilities", in which generation may occur at many different points in the network at many different scales, with much greater sensitivity to network costs and consequent matching of local generation with demand. The emergence of distributed utilities could play an important role for renewables, particularly photovoltaics which could be used to strengthen weak points in networks and which may be matched to loads at the point of end-use. At present much remains to be resolved about the adequacy of interfacing technologies, control systems and planning capabilities for distributed utilities. These, and the broader issues of integration with reference to network flows and the interaction of different renewables, all can clearly enhance the prospect for renewables but require further study. At the opposite end of the scale, there is much interest in expanding European electricity networks. Many interests are promoting stronger East-West electricity links, within the EU and through Central/East Europe. The technology for subsea cables has improved considerably;

87 Norway is actively pursuing the idea of a cable direct to Germany, and Iceland has even proposed one to Scotland. Such schemes could have big implications for renewable energy. Wind energy. Wind energy is one of the most promising sources. Most European countries have policies for encouraging wind energy and many have declared goals and projections which suggest that wind capacity in the European Union will be at least 4000MW by the year 2000. This is a small fraction of the potential resource. The major resources are located in Ireland and the UK and along the Atlantic and North Sea coasts, but there is important potential also in some inland and Mediterranean regions. Much better data are needed concerning wind energy in Central/East Europe and the European Wind Atlas should urgently be extended to these countries and to the EFrA countries.

A major constraint is opposition to siting of wind turbines. Siting guidelines can overcome potential impacts of noise, etc; but major constraints will still arise from visual impact especially in hilly terrain. Total resource figures are highly subjective because of their dependence upon site availability, but a long-term contribution of up to 10% of European electricity may be credible from supplies on the European mainland. Integration of such a contribution is not a significant problem on the integrated European power system. Accessing larger resources around the European periphery in the long term probably depends upon development of submarine connections through the North Sea, triangulating with Scottish wind and Norwegian wind and hydro resources. Offshore wind energy adds further to the available resources and further development, including trial deep water windfarms, should be supported. Utilities are involved in wind energy but most of its development has been promoted by independent companies. Direct support of wind energy to overcome initial hurdles and reflect environmental benefits, protection of independent wind generation against utility monopoly powers, streamlining of planning procedures, and improved wind resource mapping in complex terrain are all helpful. For promoting the application of wind energy, regulations governing access to utilities and connection costs are particularly important, and the most appropriate structure of incentives is output credits in some form, and/or low cost loans. PV Solar cells. Photovoltaic energy is a high-cost source but one with important niche advantages. In Europe the main applications are likely to be for remote power; as "embedded" generation in utilities to help strengthen networks; and as PV-cladding integrated into building surfaces particularly for service sector buildings. Central PV power stations are not a promising focus, but there may be important links with development aid as a way of providing basic needs and building a bigger international market for achieving cost reductions [policy issues to be further explored]. Hydro power. Hydro energy from large dams is almost fully exploited in western Europe; excepting a few possibilities in Spain and Portugal, further significant projects are unlikely because of environmental opposition. There is greater potential in Scandinavia, especially Norway which has a surplus potential of at least 30TWh/yr;, Norway's proposed north sea submarine cable would bring this and more hydro power to central Europe. Within central/east Europe there are significant possibilities in Austria, Rumania, Albania and Poland, but the biggest are in Georgia and on into Russia. Excluding Russia, the additional practical potential for large hydro in Europe is probably 2-3% of total European generation. Better planning and operation can mitigate some adverse environmental impacts, but the unavoidable social and

88 environmental impacts of m a t i n g new reservoirs remains the biggest constraint. The other factor is financing, because of the long lead times, long lifetimes, and capital intensive nature of large hydro. Exploiting the remaining acceptable potential will depend primarily upon provision of low-interest loans for eastern Europe combined with successful price reforms. The same issues dominate developing country prospects. In both west and central Europe, the appropriate focus is now upon small hydro plants - under 10MW, and sometimes much smaller run-of-river schemes. Data discrepancies of over 100TWh/yr in resource estimates within the EU alone need to be resolved, and resource surveys carded out in central/east Europe. Industries and technologies are mature, but key obstacles include terms of grid access and lengthy and bureaucratic authorization procedures in relation to land planning, environmental impact, and water abstraction. Default permission procedures should be considered. Integrated projects combining small hydro, wind and PV energy for mountain villages deserve closer consideration. Tidal power. Tidal estuary energy is an important resource for the UK and France if large tidal schemes are considered; but these face major obstacles of long-term financing and environmental concern, though on most criteria the positive social and environmental impacts seem likely to outweigh the negative. There is a strong case for developing one or more small or medium schemes in the UK, but all tidal developments will depend heavily upon local and national government policy and financing. The energy resource of tidal streams is substantial in several locations but convincing conversion technologies and costs have yet to be presented. More imaginative technology studies, and resource studies including the Baltics, are required. Wave power. Wave energy is a major resource along the Atlantic continental shelf, with a technical potential of several per cent of European electricity demand. At the shoreline, the resource is very much smaller and heavily constrained by environmental considerations; support for shore-mounted schemes should be considered only in the context of island supplies or the knowledge generated for off-coast devices. Despite an enormous variety of design proposals for off-coast and open ocean wave power, the most detailed assessments indicate costs 2-6 times the current cost of conventional power generation. Cost reductions are possible from further design development, better use of existing marine experience and construction infrastructure, and development of underpinning technologies (eg. materials). Availability of multipurpose undersea transmission cables would also significantly reduce costs and the north sea resource needs to be reconsidered in this context, as does the possible implications of a connection to Iceland. Furthermore, the concentration of winter output could boost the value of wave energy.

Wave energy assessments have been too focused upon national studies of particular devices. A collaborate study is needed between the interested countries which focuses first upon the key generic issues, in parallel with sufficient funding for design teams to test concepts and key components and develop full proposals. An independent assessment of tenders towards the end of the decade should then be able to assess whether any schemes are worth supporting to prototype stage. PART IV. Heat supply and renewable primary heat sources

89 Heating as a demand sector is frequently neglected in energy policy assessment because the costs involved are smaller than for electricity and transport fuels and it does not depend heavily on oil. But it is a very important sector for renewable energy, comprising at least a third of European energy demand. Existing fuel sources for heating are very diverse, with great regional variation, and still homes without adequate heating. The extent of higher cost or more awkward fuels creates important opportunities for renewable heat sources; and the price of the cheapest and/or most convenient fuels, gas and oil, are both likely to rise for various reasons including the growth of gas in the higher-value application of power generation. Furthermore, government and Cohesion fund supports for the extension of gas infrastructure, particularly in southern Europe, amount to subsidies which bias the market against renewable heating options. Such expenditure needs to be subject to much closer scrutiny, and compared against the localised renewable energy alternatives. District heating, also drawing on a wide range of input fuels and sometimes combined with power generation, forms an important route for heating particularly in Scandinavia and central/east Europe. Technologies for transporting, monitoring and metering heat have continued to develop and it now forms a mature industry; district heating applications are likely to grow throughout Europe. This is important both because it provides opportunities for renewable sources that benefit from economies of scale, and because it opens the possibility of interseasonal heat storage, which in the clay soils widespread in Europe may add only marginally to the costs of renewable heating itself. However, the market for energy in buildings is complex and conservative. A web of market failures arise from lack of information and/or interest on the part of occupiers, tenant/landlord divisions, and public ownership and capital constraints. District heating is similarly complex; large scale schemes usually only proceed with the backing of strong local government because of the need to plan heat mains and building connections, but smaller scale systems, eg. for housing estates, may become more common in the private construction sector. Solar heat and lighting energy. Case studies of solar design for new buildings or major extensions in a variety of conditions show typical gains of 20-30% of total heating demand with simple payback periods of 10-20 years (neglecting non-energy benefits or disbenefits). Various advanced technologies, particularly transparent insulation materials and "smart glasses" which insulate whilst letting in controllable amounts of heat and light, could increase the economic potential further. The potential is larger in northern than southern Europe because the longer heating season and higher demand more than offsets the reduced radiation. Active solar water heating is unlikely to be attractive in northern Europe, but already contributes significantly in southern Europe and southern Germany, and nearly 7% of water heating in Greece. At present it is largely a craft industry and its application - and performance might be increased greatly by manufacturing developments in markets throughout southern Europe. Also in southern Europe, the rapid growth in air conditioning demand highlights the potential for passive solar cooling techniques of which much more study and development is needed. -

Technical scenarios suggest that passive solar gains in EU buildings could displace an additional 2-3% of total EU energy demand by 2010 (compared with a "business as usual" baseline which remains near 1990 levels) though other scenarios indicate barely a tenth of this

90 potential for reasons which are not clear. Increasing the contribution of direct solar energy use requires a four-part strategy: information and training schemes, including pilot demonstration buildings; development of building regulations to ensure use of the simplest low-cost solar options; financial incentives (low-cost loans, tax, and/or mortgage incentives) for retrofitting measures and as part of overall building energy performance incentives; and research and development, mediated through a network of building research establishments but also bringing in construction and architectural professions. Solar-aided district heating is unlikely to be economic for locations connected to gas grids or with easy access to oil until prices rise substantially, but it could be attractive particularly for mountain villages. There is a strong case for supporting some such applications as trials in parallel with continued R&D. Solar thermal power conversion is a commercially-proven technology, but one of little interest for generation in Europe because its viability depends upon sustained and intense direct sunlight, and economies of scale involving several square kilometres of land. In such conditions the power is much cheaper than from PV for centralised generation, and this could be an important option for north Africa and other regions south of Europe. Europe leads the technology, but support to keep the industry alive should be considered only in terms of export opportunities and possibly development aid. Geothermal energy

Geothermal energy from aquifers is a valuable but modest resource for both heating and electricity applications, though problems have been experienced with heating applications. Production of electricity from "hot dry rocks" in Europe requires creating reservoirs at depths of several kilometres, and R&D has demonstrated that this is economically and perhaps technically infeasible. However the R&D focus was erroneous. The extraction of heat from dry rocks at much lesser depths and temperatures could be viable for direct heating applications where district heating is or can be employed, but this has barely been considered. This could be particularly important in the context of refurbishing large lignite-based heating systems in eastern Europe. The resources and the technical and economic issues need to be urgently explored.

PART V. Biomass and wastes for electricity, heat and transport The resource

Biomass, including that embodied in agricultural and municipal wastes, is a major resource with diverse potential: as a hydrocarbon fuel it can be diverted to heat, electricity and/or liquid fuels. Furthermore there are many and varied pressures which are increasing the availability of this resource for energy applications. Energy production from agricultural and forest residues and industrial and municipal wastes accounts for 1-2% of Union energy supply at present, and much more in most EFTA countries. This represents only a small fraction of the total energy in such residues, which probably exceeds 250Mtoe, more than 12% of total European energy demand. The growing use of agricultural residues for energy is being driven largely by environmental objections to activities like open-field straw burning and the impact of dumped residues on soil acid, nitrate and ammonia loadings. The dispersed nature of agricultural and

91 forest residues makes the availability of small-scale conversion technologies - which also simplify the return of conversion ashes to the soil as fertilisers - very important. The municipal solid waste (MSW) produced annually in the Union has an energy content of 10-20 Mtoe/yr. A primary motivating factor for burning MSW is the difficulty and cost of disposal arising from an exhaustion of convenient sites and increasingly stringent environmental regulations. Collection of methane for power generation from landfill sites is also being driven partly by environmental and safety regulations on site management. The same holds true for liquid municipal wastes, where the high expenditure incurred in cleaning up sewage could be turned more towards this modest energy resource. Dedicated crops for energy production could further expand the biomass potential. This possibility interacts centrally with Europe's agricultural problems which are generating immense pressures to find alternative uses for farmland. It appears that the scale of incentives for set-aside land under the 1992 reforms of the Common Agricultural Policy, and other supports for tree planting, in many cases exceeds the cost of planting and managing forests and various potential energy crops. Under the present economic and political conditions in European agriculture - which seem likely to persist in one form or another for many years biomass in the field thus may be available at virtually zero net price; the production cost will effectively be borne by the taxpayer. Conversion of all the land potentially arising from the current set-aside provisions (including non-compulsory and pastoral) for energy production would result in a gross yield of around 150Mtoe, or 14% of 1990 EU primary energy consumption. Though additional set-aside land is likely to become available in the future - in central and east Europe as well as western Europe - the realistic and desirable potential is clearly smaller. Large contributions from set-aside farmland depend not only upon both supply and conversion economics, but upon environmental criteria. Most European environmental groups oppose biomass plantations for energy because of their potential impacts on landscapes, soil and biodiversity. If dedicated crops for energy are to contribute much to European energy supply, then alongside efforts to develop better energy crops and conversion technologies, a concerted effort to develop consensus on environmental guidelines and ensure that they are respected will be essential.

Electricity and heat production Woodfuel for heating still accounts for several percent of European energy supply. More efficient household stoves could be promoted. In villages and towns, supply through district heating is generally more efficient and convenient; the Austrian experience shows that it can be an attractive and very large option in circumstances with large wood supply and central European climatic conditions, given government coordination and support. The biggest outstanding potential is in central/east Europe. A high priority should be accorded to promoting biomass and waste use for heating in the refurbishment of district heating schemes, not only because of the environmental benefits over coal and lignite but also because of the benefits in terms of rural employment in these depressed economies. MSW incinerators can be built to sufficient standards to avoid significant toxic emissions. Such clean-up increases the cost but also raises the conversion efficiency. MSW generation should (unlike many industrial wastes) be eligible for any output credits for renewable energy generation; but the main driving force is likely to be waste disposal and recycling policy,

92 which needs m be formulated carefully with respect to the implications for MSW incineration for example regarding separation of different waste streams. At landfill sites, legislation requiring collection and flaring of methane for reasons of environment and safety exists in many member countries and should be enforced throughout the EU; under these conditions, it is likely that generation from landfill sites would grow rapidly. Agricultural residues are increasingly being used both for heat and power production, combined or separately. Expanding their use more will depend upon: environmental regulations regarding residues; output incentives for heat and/or power; and the development of better technologies for generation at scales no bigger than a few megawatts, and often smaller. Biogas digesters and small scale gasification for diesel engines are reasonably well developed but still capable of improvement. Direct combustion in Sterling engines and pyrolysis require and deserve further development. At present it does not seem possible to choose unambiguously among these options and each may be relevant in different circumstances. A more consistent and targeted network for developing and promoting such technologies and communicating results is required; the most effective incentive will be output credits for generated heat and power. Generating electricity from dedicated energy crops will in the long term require far more efficient conversion technologies, to minimise the land take and to remain economically viable if and as production supports are withdrawn. Gas turbines are the most promising such technology. Pyrolysis oils are a possible fuel and offer benefits in terms of fuel storage and transport, but there are various technical obstacles and costs arising from the additional conversion stage. The most promising technology for large-scale dedicated applications appears to be direct gasification, with herbaceous crops and short-rotation wood coppicing the most promising fuel options. The full benefits of gasification will not be realised until scales of at least 30MW are reached. These economies of scale need to be set against the loss of potential CHP applications. But because the scope for district heating is limited, especially in western and southern Europe, larger-scale and electricity-only technologies such as gasification also deserve support. The potential multiple benefits are such that the EU should embark upon at least two demonstration projects at this scale in the next few years, at different locations and with different fuel supply and plant parameters. Simultaneous crop growth and processing trials are required, together with establishment of initial plantations for supplying the demonstration plants. Biomass applications for heat and power therefore are complex and varied. Many different technologies and applications for different residues and crops can be employed at different scales. This highlights the importance of using market incentives backed by good information networks across Europe.

Biofuels for transport Alcohol produced from sugar and starch can be used as a fuel for transport in Europe most easily by converting it to ETBE and using this as a gasoline additive. But the cost of producing ethanol from conventional crops is 3-4 times the cost of gasoline (net of excise taxes) and is of limited overall energy benefit; the energy in the ethanol is comparable to that used in producing and converting the crop. Given the resulting imperative to maximise yields,

93 the net environmental benefit is doubtful and the economics, stripped of subsidies and incentives, are extremely poor. Ethanol from sugar beet is not much better. "Bio-dieser', principally the production of RME from rapeseed, can be used in diesel engines with little modification and has an environmental advantage over petroleum diesel of degrading rapidly if spilt. The overall production costs are higher than for ethanol and the practical contribution will anyway be constrained to under I% of EU fuel consumption because of internationally agreed limitations arising from US fears about the impact on co-product markets. Use should be directed only to certain niche markets, notably off-road vehicles (eg. military operations) and perhaps some buses in town centres. There are several alternative routes to liquid fuels, especially from potential southern European crops. Among the sugary crops, sorghum is particularly promising, offering higher yields than is possible from grain or sugar beet with low cost, water requirement and environmental impact, and the residual bagasse is better suited for collection for heat and power generation than straw. Difficulties arising from instability of the sugars complicate the process and highlight the need for further development of crop and integrated processing. Enzymatic techniques for converting cellulose to ethanol are being pursued strongly in the US; they may also be applied to generating ethanol from waste paper. But probably the technically most promising route is to use advanced pyrolysis conversion to decompose biomass of various forms into liquid "bio-crude". Much further work is required but there are reasonable prospects that this could be mixed in with crude oil as a refinery input, at a cost of $30-40/boe. As compared with the ethanol and bio-diesel routes this offers a much higher overall yield and offers some flexibility in both biomass input and applications, at perhaps half the cost - though still about twice the current price of crude oil. Much development is necessary and could be linked to that for biocmde-based electricity production; oil companies would have to be involved in developing and assessing the refining options for liquid fuel applications. Legislation to exempt biofuels from the excise taxes on motor fuels, enacted in France, Germany and Italy and proposed for the European Union, amount to a very big subsidy additional to those already available directly under the CAP. The scale of subsidies would then be sufficient to make production of ethanol and bio-diesel using current processes economically viable in some circumstances. This is a dangerous strategy that could just transfer the historic problems of financing and trade disputes of the CAP to the energy sector, and to renewables in particular. It could encourage large investments in processes that have limited prospects for improvement and no prospects for commercial viability without support even at much increased fuel prices. The focus of policy needs to be upon R&D and the design of incentives that encourage innovation in both crop choice and conversion technology.

Part VI. (a) Integrated market analysis The review of market structures for electricity, building heat and transport reveals the extent to which these markets are not homogenous, and how matching different kinds of renewables to appropriate market segments would improve their prospects - if the organisation of the market can reflect these 'niche' benefits.

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Remote applications The most obvious niche application are those for remote systems, away from electricity and gas networks and easy bulk oil and coal distribution. Remote applications in Europe consist mainly of islands or mountain villages, though there axe also regions particularly around the periphery which are similarly characterised by difficulty of access. In such areas, integrated renewable energy systems can comprise any mix of small hydro, wind, solar heating, PV, and biomass for heat, electricity and/or liquid fuels, and may include electricity and/or heat storage. The economics of such systems may frequently be favourable compared to conventional supplies, whether delivered by network extension (of electricity), or by direct freight delivery of fossil fuels. But in much of Europe such integrated systems are rarely considered. This is partly a problem of information and the difficulty of developing and demonstrating integrated systems in which the local community can have confidence, given that each needs to be tailored to local conditions. Support for a more effective industrial base in remote systems that can be tailored to local needs should be considered, perhaps as part of the structural fund expenditures. In much of Europe such integrated systems are rarely considered or compared against network expansion, particularly for electricity. The institutional force behind network expansion and the neglect of alternatives represents a substantial distortion. A requirement to compare such expansion against decentralised options should be considered, perhaps as a mandatory component in the context of Environmental Impact Assessments that may be required for significant network expansions, would be one way of addressing this.

Electricity systems The attached table sets out the relevant structure of electricity supply against appropriate renewable electricity sources, with indicative estimates of the competing conventional supply cost and the potential renewable energy contribution in the different market segments. All these numbers - costs, but even more the potential contribution - are uncertain and in part subjective judgements.

TABLE: Electricity supply structure and potential renewable contributions Application

Sector

% EU supply

Competin Relevant g cost, renewables ECUc/k Wh

Isolated

Off-grid houses, holiday homes, communications

c. 1%?

10-50

PV/windbattery

0.5%

Remote

Islands, mountains, other

c. 4%?

5-20

Wind, microhydro, biomass, shoreline

3%

remote

communities

wave

Grid connected

Potential contributio n

Prospects

95 Building end-use

Service

20%?

5-10

PV-clad Biomass

Local network

Domestic

50%

5-10

PV-clad

Weak

8%?

5-15

Rural

10%?

4-10

M.nicil~l ~ds

60%?

3-6

Embed PV Wind Small water Bio-CHP Wind Small water MSW

Regional utility

All ~ d

regions

Centralised

Biomass

3-4.5

Wind Bio-res

National tranmissn

Internationahmport S

TOTAL plausible potential (** or higher)

EU periphery

3-4

All grid

2.5-3.5 at border

4% 2% 8%

*** *** *

2% 1% 1% 4% 1% 2% 2% 1%

** ** **** **** ** **** **** ***

3% 3% 3% 3% 1% 2%

*** **** ** **+ **** ****

Bio-crop Small water Landfill High wind Big tidal Geo-aquif Offshore wind

b$'%

0.2% 4%

*** **

Large hydro Wind Geothermal Ocean wave

3% 2% 2% 4%

**** ** * *

Wind onshore off/imp PV Hydro Biomass MSW/landfill

7% 6% 6% 3% 11% 3%

*

Notes. Most data are authors judgement based on discussion in relevant chapters. They are preliminary judgements which may be revised in the final publication. Potential contribution: Contribution to total EU electricity production under maximum plausible exploitation given either market-matching constraints (eg. for PV cladding, realistic surface area x time of day and seasonal mal~hing constraints) or resource constraints. Prospects. On scale of **** very promising to * unpromising. Small water = predominantly small hydro, but with some possibilities of small tidal and shoreline wave schemes.

U p to 5 % o f electricity use m a y be for remote applications, c o n s i d e r e d above, a n d it seems plausible that r e n e w a b l e s c o u l d capture the bulk o f this market. O f the rest - the bulk p o w e r m a r k e t - if it a s s u m e d that the only feasible market for P V is integrated c l a d d i n g o f service sector buildings, the P V contribution m i g h t be 4 % ? o f E U electricity d e m a n d . T h e estimates indicate w i n d e n e r g y contributing a total o f 7 % o f E U grid electricity t h o u g h a m i x o f m a r k e t s e g m e n t s f r o m o n s h o r e resources within utility areas, a n d perhaps nearly as m u c h again from

96 remote and offshore generation. The additional contribution from small water schemes principally small hydro but potentially some tidal and shoreline wave schemes - is 6%; additional big hydro, including transmission from Norway and eastern Europe, adds another 3%; and biomass contributes an estimated 11% again through a wide range of market segments, comprising both residues and dedicated crops. Generation from landfills and MSW adds a further 3%.

The numbers are crude but probably adequate to indicate important features of overall outlook for new renewable electricity production. The first is the sheer range of kinds of contribution that need to be considered. Individually all the contributions are small; yet there are so many different aspects that the total estimate is more than a third of European electricity, at costs which should not be prohibitive. To get much higher than this from domestic resources would require using PV outside its niche applications and/or exploitation of ocean wave energy or the big tidal schemes. Without these higher cost sources, to get a much higher renewable contribution would require importing renewable electricity on a large scale from peripheral regions towards central Europe. Some elements which are clearly available in surplus at reasonable cost - those like Norwegian and Icelandic hydro and potentially wind or geothermal - are indicated on the table (others could include Russian hydro and wind energy, and solar energy from Turkey and north Africa; but both the costs and availability are in doubt).

Another important observation is that although a slight majority of this contribution is obtained from production which competes directly with centralised fossil fuel production, a great deal does derive from market segments where renewables have a comparative advantage by virtue of their proximity to demands. This is important not only in terms of the ultimate contribution and its economic feasibility. More important, these 'niche markets' represent a huge potential market, quite sufficient to ensure development of mature technologies with economies of scale. It is through these markets that the modernised renewables could become established and secure enough industries to compete directly in the full range of electricity markets, in Europe and elsewhere.

An important obstacle to renewables, therefore, is the fact that current electricity markets do not reflect these potential niche advantages. For remote applications, some reasons for this

97 have been sketched above. Within networks, these issues highlight the potential importance of network-sensitive pricing and ultimately perhaps fully distributed utility structures. A particular component of this concerns the connection of previously isolated systems (such as Crete) or at least partially-'islanded' higher systems to the European network. Many such infrastructural extensions at present are receiving funding from the EU. As with connections to remote regions, such a funding represents a subsidy and should be compared against the indigenous options.

The terms of supply to and buyback from commercial buildings is important for PV, and capacity charges and power quality elements need consideration. The opening of supply to independent power producers should also be accompanied by more sophisticated time-ofsupply pricing based on a realistic reflection of system operating costs. For big renewable energy contributions, the resource on the European periphery - Scotland, Norway, Iceland, and ocean resources to the north, hydro and wind resources to the east, and solar resources to the south - cannot be ignored. Concerning the former, proposals for submarine cables need to be scrutinised with respect to the access they may give to these more remote renewable resources. This is particularly the case for the proposed cable from Norway to Germany, and its routing with a view to possible access to north sea wind and wave resources, and prospects for a link to Scotland and even on to Iceland.

Heating. A similar analysis can be carded out for heating. The provision of solar heating and cooling, backed up by biomass or conventional fuels or possibly connected to district heating with interseasonal storage, needs to be considered as a strategic energy option in regions with a reasonable solar resource especially where not currently connected to gas. This could apply to Greece and much of the Iberian peninsula. Structural funds support for gas pipeline and distribution in Greece particularly may represent a serious distortion in the light of its relatively high costs, and good prospects for alternative heating (and electricity) supplies.

In eastern Europe, PHARE expenditure upon gas distribution and district heating refurbishment also needs to be closely scrutinised with respect to more localised alternatives. Renewable options may include biomass, varied wastes, geothermal heating and solar inputs in a variety

98 of forms. Because many renewables may not be available immediately, district heating refurbishment should emphasise efficiency and avoid heavy capital expenditure on new fossil fuel conversion plants: various renewable energy contributions may emerge over time as viable inputs to district heating systems.

Across Europe, passive solar design is important, raising the various issues described in that chapter. Service sector buildings also may provide opportunities for integrated renewable contributions, comprising solar heat and lighting gains, internal use of wastes and biomass (or gas) CHP, as well as integrated PV cladding, which need to be explored.

Transport Transport is the most homogenous and the most difficult market for renewable energy. For the next few decades the most attractive opportunities may lie in biodiesel for offroad and inland waterway fuels, and possibly advanced cars operating on PV-electricity or PVhydrogen for city fleets if these prove feasible.

The overall contribution The contribution of renewables is limited by resource, environmental and economic considerations. Within the EU-12, or indeed EU-16 or potentially a Europe of 24 or so nations, indigenous renewables can no more meet all energy needs than can indigenous fossil fuel production, on conventional energy projections. This serves to emphasise the continuing importance of energy efficiency; even in the very long term, a predominantly renewable energy system only seems possible if the efficiency of energy use is greatly enhanced, to levels which substantially reduce total energy requirements. Yet even for more conventional projections of energy demand, renewables could make a major contribution to the diversity and sustainable of European energy: depending partly upon transport growth and statistical definitions they might even grow over the first half of the next century to supply half primary energy requirements if adequate technologies are commercially developed and demonstrated, and if the economic and other conditions are right.

PART VI(b): R&D strategies Research, development and demonstration are essential components in an overall strategy towards the promotion of renewable energy in Europe. The proposed trebling of EU RD&D

99 funds for renewables is a big opportunity, but past experience demonstrates the need for clear definition of goals and strong oversight. Principles on which ELI energy RD&D expenditure should be based are: positive cost benefit ratios; diversity of benefits in different scenarios; comparative European advantage; non-energy costs and benefits; prospects relative to directly competing options; and, for EU sponsorship, European-wide relevance.

Many specific sectoral needs can be identified. Cross-sectoral needs include the development of cross-cutting technologies (eg. materials and power electronics) and integrated systems including various combinations of renewables in different locations and applications, including mountain, island, and connected offshore systems. Better definition of RD&D criteria and policy is itself a useful research topic.

It is impossible to assess with accuracy the justified expenditure required for such an extensive programme in advance; expenditure needs to be judged iteratively according to the quality of research proposals, the development of technical streams and the build-up of engineering capabilities. With adequate backing, renewables could meet the same goals as claimed for fusion power, but with greater certainty, lower cost, and wide-ranging intermediate benefits. European energy RD&D needs a comprehensive re-evaluation with agreed goals and common criteria applied to all sectors.

Increasingly clear definition of a renewables RD&D strategy combined with established Union procedures for research evaluation and monitoring should help to minimise the wastage and mistakes that have plagued the history of energy RD&D. A key challenge is managing the chain from research to dissemination, and feeding back market experience to RD&D. Except for big projects - which are the exception rather than the rule for renewables - the current institutional structure of the Commission is not ideal and a joint management structure for pursuing renewables from research through to dissemination would help. With the rapidly growing importance of Commission-sponsored RD&D, the relationship to member state efforts also needs clarification, with definition of a framework and criteria for co-funding of programmes.

PART VI(c) Renewable Economics: principles and policy

100 The diffusion of renewable energy technologies depends critically upon their perceived economic attractiveness to investors, whether private or state-owned. Advocates of renewable energy consistently claim that their favoured technology is, or will be, "cost effective". Often, the claim is then qualified by stating that this is or will be the case if external costs of competing fuels are taken into account, or if the long-run strategic benefits are taken into account, and/or when the technology has developed further with benefits of economies of scale. This is not the same as cost as an instrument, the arbiter of decentralised decisionmaking in market economies. The enthusiastic promulgation of the idea that renewables are "cost-effective" can from this perspective suggest to governments that they do not require any support. In fact, few renewables are currently competitive with fossil fuels in the eyes of private investors. Policy needs to consider three main economic issues:

Levelling the playing field, by ensuring adequate market access on fair terms and avoiding competing subsidies for fossil fuels;

Broadening the playing field, by ensuring that external impacts of conventional energy activities are taken into account; and

Lengthening the playing field, by redressing the short-term, high discount-rate focus of private finance.

Capital subsidies reduce up-front investment commitments, thereby encouraging risk-taking and innovation. But they do not differentially reward good performance, can distort machine design, and are vulnerable to budgetary cutbacks. The direct complement to capital subsidies is output credits, which enhance the value of energy generated and can be considered as a way of forcing the market to reflect the benefits of avoided external costs. They reward good performance, as determined by the energy output, but do not much reduce risks; they encourage incremental improvements but not more risky innovations. In reality a mix of these instruments, which shifts towards output credits over time is likely to be the most appropriate pattern, and is indeed the pattern which has emerged in some countries such as Denmark.

Output credits can be formulated in many ways. For electricity, it has been achieved in several countries (eg the US, Germany, Denmark) by regulating directly the terms on which utilities must buy power from independent renewable energy generators. In the UK, the same effect has

101 been achieved with the NFFO. There is no 'right' approach: different approaches have different characteristics, in terms of both their effectiveness and feasibility given existing conditions. Given the different starting points and different structures within the EU, different kinds of support are likely to be maintained in different EU countries for a very long time.

Investment timescales, and expected rates of return on investments, are a generic issue for renewables. There is a very real dilemma and tension between the relative short termism of private capital and the long term returns of many potential renewable energy technologies, and even longer timescales implicit in strategies for promoting renewable energy developments. To deal with this, a special low-interest loan facility should be established which enables the private sector to obtain funding at interest rates close to social discount rates. This has several attractions as a policy instrument:

it reduces the capital hurdle to innovative investment; it does so without distorting the design characteristics to anything like the same extent as capital grants; it establishes a fund which in principle can be self-financing over the longer term, unlike pure grants; it can be applied in combination with other incentive schemes without interfering with them; thus it can be developed at the European level to complement national measures.

The level of support could be adjusted readily either by altering the interest rate or, more likely, by controlling the proportion of project co-funding that could be derived from this source. Such a fund should be administered through the European Investment Bank. This would place renewable energy at the heart of European-level finance for energy development, and could thereby play a powerful financial and institutional role in fostering investments in renewable energy within and even beyond the Union. The establishment of such a fund should thus be considered as a primary instrument of European renewable energy policy.

Acknowledgements. The support of the European Commission, under DG-XII's Joule II programme, is gratefully acknowledged.